Private pensions, a meaningful industry with an important social role

The best time to think about long-term care is before you need it

From its start until now, the private pension market (2nd Pillar) has undergone a consolidation trend, as it started with a total of 18 authorized funds and today there are only 7 funds. In the same time, the development is positive: the main indicators of the private pension system – the number of participants and the net assets of pension funds - have maintained an upward trend, registering monthly increases from start till now.

Moreover, the private pension funds’ investment results for the customers are very good, with a market annual average return of 11.2% for the mandatory pension funds since their launch, and 8.2% average annual return obtained by optional pension funds (APAPR, September 2014). Last, but not least, the private pension funds have an important role for the economic development of our country, as they hold 11% of Romania’s state bonds and have about 94% of investments in Romania.

Eligible people are automatically enrolled into 2nd Pillar - and that is a good thing, because everyone will have an extra amount of money in addition to public pension on retirement. Unfortunately, young adults do not have the most basic of money management skills, they do not take control of their finances and this is a fact. More than 90% of new monthly participants entered the market through lottery, that means, they did not sign an adhesion, but were obligated by the law to enter the system and CNPAS organized a lottery to redistribute them proportionally among all the funds on the market. Young people need financial education programs from an early age, as financial literacy is a core life skill in our modern and transforming society.

Also, the way financial information is communicated is crucial to effective engagement. It has to be made interesting and relevant otherwise it will not be absorbed, and private pensions companies should sustain and finance educational financial programs for young adults.

The mandatory private pension represents a step forward in order to improve the quality of our future life. But, a contribution of a 4.5% level from the gross wage is not enough to provide a significant replacement ratio to supplement public provision. The contributions level transferred to the mandatory private pension funds should further increase, so the contribution for 2015 would have to be 5%. It is also important to respect the commitment to reach 6% by 2016, in accordance with the original schedule of contributions. This increase is essential for the private pension market.

Over 6.2 million participants and about EUR 4 billion net assets formed the mandatory pension market in September 2014. These main indicators of the market, tell us that we have a meaningful industry here, with a very important social role. Just over 337,000 participants (September 2014) opted for the 3rd Pillar (optional pension). Given that, we can say that the mandatory pension is the only source of saving for retirement for some low-income population. But we have to know that, according to statistics, the state pension will be 28% of gross wages in 2050, from about 48% as it is currently under EU date, and the 2nd Pillar contribution will reach 6% from the income; that is why we have to opt in for long term savings product, and the 3rd Pillar can be one of our choice. The main objective of the 3rd Pillar is to provide an income in retirement.

Therefore, employers should become more involved in the financial education of their employees. They also may include the optional pension into the employee benefits packages and help employees save more for their retirement, helping to address the savings gap in Romania, and improve the employees’ understanding and engagement towards saving for the retirement period. The 3rd Pillar optional pension is funded through the employee’s and employer’s contributions and the Government tax relief. Expenses concerning optional pensions are deductible for the employer up to a limit of EUR 400 per person a year. The tax break for contributions directed to optional pension funds are exempt from the personal income tax and social taxes.

The tax deductions ceiling is of EUR 400 EUR or EUR 800 per year, depending on who contributes: the individual or the employer alone or they both contribute, in which case the tax breaks added make the retirement savings product more attractive. Furthermore, additional saving is a must (private pension, deposit or other form of investment). The best time to think about long-term care is before you need it. It is critically important to realize that we cannot rely on the state pension if we want a decent pension and we do not want to become a burden for the family, children or for society.

As for the short and long term priorities for the private pension market, given the steady increase in net assets, there is a need for a flexible legal framework for investments, in order to obtain a diversification of investments and reduce the risks. It is also necessary to prioritize and to establish the payment methods of the private pensions, as this will help increase confidence in the private pension system.

By the end of September 2014, BCR Pensii was accounted for the pension funds administration of over 591 participants and RON 1,209.37 million net assets under management, according to data from the Financial Supervisory Authority – Private Pensions Sector. Our focus is on the optional pension market. In 2014, it has consistently been the top choice for the new participants that decided to opt in for an optional pension fund so that when it comes to retirement, they should have a decent income to live.

Private pensions work complementary with the state pension, diversifying the sources of income in retirement, ensuring an aggregated and decent living. Therefore, BCR Pensii focuses on the actions and projects to help increase the public’s awareness of their options for retirement savings, both regarding employees and employers. Unfortunately, there will be major negative changes that will affect us all. Few of us know that the pressure on the public pension system will increase by 2060, and the state will have to spend about 13.5% of GDP in pension payments. Currently less than 1% of pensioners have an income of more than 2,000 RON per month obtained from the state pension.

Aging population estimations imply that there will be fewer workers to support the pensioners. Besides the negative impact on future pensioners, demographic changes will influence the economy. Changes in the population structure will cause a change in consumer preferences and the demand for goods and services. The labor market will also be affected and employers will have to adapt to these changes.